Diversified Investments Reduce Risk And Increase Opportunity.
Are You Diversified Enough?
The failure to create a portfolio of truly diversified investments is the first pitfall that causes investors to fail to achieve their intended goals.
Investment diversification is absolutely key to successful long term investing.
But far too often... individual investment portfolios are too narrowly diversified.
The scope of true investment diversification goes well beyond... mere Broad Asset Class (stocks, bonds, cash) allocation.
And yet... allocation across the Broad Asset Classes... is still... quite often... the only consideration given to portfolio diversification.
Diversification across the Broad Asset Classes represents...
merely one way... in which you should be diversified.
A truly diversified investment portfolio is diversified in a number of different ways.
Smart money investing is about creating... a "risk appropriate"... fully diversified...
Risk appropriate means... tailored to your own personal tolerance (or comfort level) for risk.
A well constructed "risk appropriate" allocation will be diversified in a way that maximizes your return opportunity.
And does so while exposing you to... no more risk than you are comfortable in taking.
This can only be accomplished by creating a portfolio of truly diversified investments.
So you see... investment diversification... is first and foremost about... risk management.
It is the... "not having all of your eggs in one basket" concept.
But diversification is also about... opportunity.
Opportunity for potential gain that might otherwise be missed.
Investing without diversifying... is mere gambling.
So... how about your portfolio?
Do you know... to what degree... your investments are actually diversified?
Do you know... if you are diversified?
Do you know... in what ways... you should be diversified?
FIVE ELEMENTS OF DIVERSIFICATION.
Truly diversified investments exhibit diversity across the following five elements.
Broad Asset Classes
Stocks, bonds, and cash are the most common Broad Investment Categories.
Each have different qualities and strengths... as well as risk and reward characteristics. Understanding these asset classes and how they differ from each other is important to choosing the best investment strategy for your own needs.
An investment portfolio of truly diversified investments will be diversified... across the Broad Asset Classes.
Click here for an expanded discussion about the Broad Asset Classes.
Style Box Allocation
The Style Box is a graphical tool created by Morningstar to quickly and visually illustrate diversity... or lack of diversity... in regard to an investment's breakdown between Large Cap, Mid Cap, and Small Cap companies. Market Capitalization is one measure of a companies value.
The Style Box also illustrates the breakdown between Value, Blend, and Growth type holdings.
An investment portfolio of truly diversified investments will be diversified... across Market Capitalization sizes as well as across Holding Types.
Click here for an expanded discussion about Market Capitalization and Holding Types.
Stock Sector Breakdown
A sector refers to a group of companies that are in the same Industry. Sector or Industry examples would be... health care, manufacturing, or technology.
An investment portfolio of truly diversified investments will be diversified... across Stock Sectors or Industries.
Click here for an expanded discussion about Stock Sectors.
Regional exposure refers to how your investment portfolio is allocated around the world. In other words... to what degree you are invested in various regions of the world.
An investment portfolio of truly diversified investments will be diversified... across multiple regions of the world.
Click here for an expanded discussion about Regional Exposure.
Portfolio holdings refers to... the percentage of your total holdings that each individual holding represents.
An investment portfolio of truly diversified investments will be diversified... across the total Portfolio Holdings.
Click here for an expanded discussion about Portfolio Holdings.
There are many pitfalls on the path to successful investing that cause investors to fail to achieve their intended goals.
The first pitfall is the lack of diversification.
Poor investment strategy... whether it is for lack of diversification, pursuing hot stocks, or attempting to time the market... often stems from the belief of investors that it is necessary to beat the market... to do well... in the market.
Nothing is further from the truth.
Proper investment strategy is as much a psychological as an intellectual challenge.
As with many other challenges in life... it can often be best to seek professional help to structure and maintain a well diversified portfolio.
If you decide to seek help... make sure to select a professional investment adviser who agrees with the basic principles of diversification and long term investing.
Truly diversified investments help investors... avoid the pitfalls... and reap the rewards of long term investing.
Are you diversified enough?
"Because It Matters"... Jim
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